The positioning of Cyprus as a leading international business centre has been

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2 European directive helps The incorporation into local law of the EU merger directive has created the possibility of tax-neutral international mergers using, explains Sophie Stylianou of Eurofast Taxand The positioning of as a leading international business centre has been accepted by many throughout the years due to, among others, its strategic location. As Dixon states A race advancing on the East or West must start with. Its tax and legal framework and domestic policy of promoting foreign investment places at or near the top of countries for international tax planning. Recently, a number of amendments to the companies law and tax laws were announced further enhancing its appeal to foreign investors. Its EU membership allowed to create new development opportunities, which have been utilised frequently. One of the most beneficial for MA was the adoption and implementation of the EU merger directive. The provisions of the directive were incorporated in the Cypriot income tax, capital gains tax and stamp duty legislation before accession to the EU. From a Cypriot tax perspective, compatibility and harmonisation with the directive has been achieved. has opted to apply a wide company reorganisation relief regime, without imposing territorial, geographic restrictions or other limitations on qualifying companies. Though generally the provisions of the legislation about qualifying reorganisations were directly adopted from the text of the directive itself, restrictive and other limiting provisions were omitted. Mergers in and the EU Compliance with and implementation of the acquis communautaire to facilitate s membership of the EU equally implied compliance with and implementation of the provisions of Directive 90/44/EEC on the common system of taxation applicable to mergers, divisions, partial divisions, transfers of assets and exchanges of shares with respect to companies established in different member states. Further to its membership and subsequent enforcement of Council Directive 005/9/EC, further revised its legislation concerning the scope of benefits under the merger directive to European Companies (SEs) and European Cooperative Societies (SCEs). The amendments also enabled the tax-free transfer of the registered office of an SE or SCE to. The merger directive further promotes the single market by abolishing restrictions and other obstacles arising in reorganisations between companies established in two or more member states. As such, it provides for the deferred taxation of income, profits and capital gains arising during a reorganisation, subject to the fulfilment of specific requirements. Though directives are binding upon member states, the means of implementation and transposition to the domestic law of the member states are at the discretion of national authorities. 6

3 Diagram : Merger between two sister companies transfer to a pre-existing company 4 s s. Transfer of assets and liabilities. Issue of NL Co shares to the shareholders of the CyCo. The ceases to exist 4. Revised group structure Diagram : Merger between two companies transfer to new company s s UK 4 s UK CyCo NL Co. Transfer of assets and liabilities of CyCo and NL Co to UK Co. Issue of UK Co shares to the shareholders of the CyCo and NL Co. The and cease to exist 4. Revised group structure 7

4 Biography Sophie Stylianou Eurofast Taxand Tel: Mobile: sophie.stylianou@eurofast.net Web: Sophie Stylianou is an associate tax and legal adviser with Eurofast Taxand. She focuses on providing strategic tax advice about international planning, real estate structuring and international trusts for multinational companies. She also delivers guidance on the tax implications of transactions on a national and international level, liquidations, joint ventures, MA and reorganisations. In addition to mulitnational groups her clients include real estate funds, banks, private bankers and high net worth individuals. Stylianou is a regular speaker at local industry events. She holds an LLB (Hons) and an LLM in European Law obtained from UK universities and is a constituted member of the Bar Association. Cypriot income tax legislation incorporates specific provisions on company reorganisations and provides for tax relief in the case of a qualifying reoganisation, as does its stamp duty legislation. s capital gains tax legislation provides for a relief for property transfers in a qualifying corporate reorganisation. This all derives from the implementation of and compliance with the merger directive. In defining reorganisations, Cypriot tax law stipulates that a qualifying reorganisation covers mergers, divisions, partial divisions, exchange of shares, the transfer of assets and transfer of registered seat, between -resident companies and/or non-resident companies. Merger A merger constitutes an act by which one or more companies, on being dissolved without going into liquidation, transfers all their assets and liabilities to another pre-existing company or where two or more companies, on being dissolved without going into liquidation, transfer all their assets and liabilities to a new company that they form. The shareholders of the transferring company/ies receive in exchange, shares in the share capital of the other company. Any cash payment that may arise because of the transfer should not be more than 0% of the nominal value of the shares or, in the absence of a nominal value, the accounting value of the said shares. Accordingly, sister companies, or generally companies within the same group, could apply the provisions of the merger directive and respectively the law, and achieve a taxfree reorganisation. For example, a company could transfer all its assets and liabilities to its sister company situated in the. The shareholders of the Cypriot company would receive in return, shares in the company. Subject to the merger, the company would cease to exist. For the completion of the merger, a number of conditions should be fulfilled and certain approvals should be sought. The transaction would ultimately be tax neutral in. Equally, a merger can arise where a company, on Diagram : Merger between a parent and subsidiary company. Transfer of assets and liabilities. The ceases to exist. Revised group structure 8

5 Diagram 4: Division A B 40% 60% A New EU A B 40% 60% A 40% 50% of New EU B B 60% 50% of. Division: Transfer of 50% of the assets liabilities of the CyCo to New EU A and the remaining 50% to New EU B. Issue of NewCoA and NewCoB shares to A and B, proportionately in accordance with their shareholding in CyCo. The CyCo ceases to exist being dissolved without going into liquidation, transfers all of its assets and liabilities to its 00% holding company. Accordingly, in the case of a merger between a Dutch holding company and its Cypriot subsidiary company, the latter company shall transfer all its assets and liabilities to the former holding company and, further to the merger, shall cease to exist without going into liquidation. As both of these situations would constitute a qualifying merger, the tax efficiency of the transactions will be achieved: The merger in each case will be treated as a tax-exempt event in and equally, any agreement to be concluded about this arrangement shall also be exempt from stamp duty obligations if and where applicable. Division and partial division A division occurs when a company, on being dissolved without going into liquidation, transfers all of its assets and liabilities to two or more pre-existing or new companies. The shareholders of the transferring companies receive in return shares of the receiving companies, in proportion to the shares held in the transferring company. A cash consideration if and where applicable cannot be more than 0% of the nominal value of the shares or in the absence of a nominal value, of the accounting value of the said shares. In the case of a partial division, one or more branches of activities of a company are transferred, without the company being dissolved, to one or more pre-existing or new companies, leaving at least one branch of activity with the transferring com- 9

6 Diagram 5: Exchange of shares Polish Luxembourg Luxembourg Polish. Transfer of shares of Polish Co to LuxCo. Issue of LuxCo Shares to the CyCo in exchange of the shares. Revised group structure pany. The conditions in the case of a division continue to have application in the case of a partial division as well. In line with this, a company could divide its assets and liabilities equally to two new companies established in the EU. Exchange of shares An exchange of shares occurs when a company obtains a shareholding in another company, providing the first company with a majority of the voting rights of the latter company, or, having in possession such majority shareholding obtains an more shares. The shareholders of the latter company receive, in exchange for their shares, shares in the first mentioned company. A cash contribution, if and where applicable, cannot be more than 0% of the nominal value of the shares, or, in the absence of a nominal value, of the accounting value of the said shares. In line with this, a holding company transfers, free from taxes, the shares held in a Polish subsidiary to a Luxembourg company, in exchange for shares in the Luxembourg company, this situation, it is worth mentioning that though a qualifying exchange of shares will not be taxable at the Cypriot level, a company, based on its domestic legislation, may dispose of its participation in the Luxembourg company, or even the Polish company, without having to pay any Cypriot taxes. Transfer of assets A transfer of assets occurs when a company, without being dissolved, transfers all or one or more branches of activities to another company in exchange for shares in the receiving company. For instance, a company is active in investments in India and Russia. It intends to transfer its Russian investments to a Luxembourg company. For such a reorganisation to be considered as a qualifying transfer of assets, the Luxembourg company would need to issue shares to the Cypriot company, in exchange for the branch of activities to be transferred. Transfer of registered seat A transfer of registered seat occurs when a European (SE) or a European Cooperative Society (SCE), without its dissolution, and equally without the establishment of a new legal entity, transfers its registered seat from one member state to another. Though the provisions of the merger directive as incorporated in the tax legislation of, specific provisions on the transfer of the registered seat of a company are also incorporated in the Cypriot Companies Law, enabling the migration of companies from and to. As such, from a Cypriot perspective the tax relief granted under the merger directive to SEs and SCEs, is also extended to private companies. Cypriot legislation clearly provides for the transfer of the registered seat of a company to and from, subject to the fulfilment of a number of requirements. Accordingly, cross-border corporate immigrations can be facilitated, without a deemed liquidation of the company in its jurisdiction of incorporation having to be considered, which in the past, in a number of jurisdictions created a range of tax obligations at the level of the migrating company. The need for the elimination of the obstacles relating to 0

7 Diagram 6: Transfer of assets X Investments in India Investments in Russia Luxembourg Investments in India X Luxembourg. Transfer of one branch of activities to LuxCo. Issue of LuxCo Shares to the CyCo.. Revised group structure Investments in Russia Diagram 7: Transfer of registered seat and subsequent merger EU EU Guernsey 4 EU Investments/ Investments/ Investments/. Transfer of registered seat and residency of Guernsey Co to. Transfer of assets and liabilities of CyCo to EU Co being the 00% holder of the share capital of the CyCo.. The ceases to exist 4. Revised group structure

8 the transfer of registered seats of companies between member states was initiated by the need to preserve and protect the principle of the freedom of establishment under the EU Treaty and further to the wide interpretation given to that extent by the European Court of Justice on a number of occasions. The first step to this extent, at an EU level, was the passing of Council Regulation 57/00 on the European Statute, which, however, does not extend the scope of its application to private companies. Though the implementation of the Fourteenth Law Directive on cross-border transfers of the registered seat of limited liability companies is still pending, and a number of other member states have opted to incorporate provisions in their legislation enabling and assisting the crossborder transfer of a registered seat. The revised legislation enables companies to choose and migrate to a jurisdiction that is more convenient for them from a tax perspective, further to a consideration of the market requirements and demands, or otherwise. Most importantly, companies may migrate to, and continue their operations in, another jurisdiction without entering into any procedural liquidation requirements. Accordingly, the tax relief available to cross-border mergers under the EU merger directive is also extended to the cross-border transfer of a registered seat. In line with this, the beneficial tax regime of may attract many migrating companies. In view of the above, and because the transfer of a registered seat is also permissible at the jurisdiction of the company requesting the migration, it is possible for such company to transfer its registered seat to. For instance, existing companies within a group registered in, say, Guernsey and/or the British Virgin Islands, may freely transfer their registered seat to, subject to the fulfilment of a number of requirements. Such transfer may prove to be most favourable particularly in cases of restructuring seeking to achieve higher transparency. Subject to the transfer of the registered seat and respectively the tax residency of the company, a further reorganisation through a qualifying merger may be achieved, which will lead to tax relief and substantial tax benefit to the group as a whole. In line with the above, and subject to the fulfilment of certain procedural requirements regarding both the transfer of registered seat and the merger, the transaction will be effective and tax efficient. Opportunities to reorganise The global financial crisis has seen many organisations seeking to reorganise and restructure their existing corporate and tax strategies to enhance the continuation of their business. Alternatively, opportunities are presented as to expand their business operations. Supporting such company reorganisations, Cypriot legislation incorporates tax efficient strategies the aim of which is to promote the investment environment with investors globally. The wider application of the provisions of the EU merger directive and the extension of such benefits to cross-border and worldwide company reorganisations, involving Cypriot companies make an ideal jurisdiction for restructuring during the global financial downturn. Clearly, domestic MA legislation has a crucial role to play in ensuring the efficiency of the transaction, whether from a tax, legal or financial perspective, and the favourable implementation, use and management of business plans; and it safeguards and preserves a just, fair and reliable environment in the course of corporate governance. The domestic legislation of, in line with the merger directive, allows for tax relief in the form of an exemption from income tax, capital gains tax and stamp duty. Equally, a relief from the Special Contribution to the Defence Fund, as this would have otherwise been applicable in cases of company liquidations as per the deemed dividend distribution provisions, as well as from land transfer fees imposed on land transfers is allowed in cases of qualifying reorganisations. Most importantly, Cypriot tax legislation, in combination with the favourable provisions of the merger directive may serve towards the establishment of as an ideal jurisdiction for mergers and restructurings. Arguably, the domestic legislation of may be seen as the country s competitive advantage within the EU, which is principally encouraging inward mergers and reorganisations. Its low corporate income tax of 0%; the elimination of the participation exemption, extending the application of the tax relief on incoming dividends from foreign subsidiaries; the limited scope of capital gains tax; the tax relief on gains deriving from the alienation of securities and the wide and expanding network of double tax treaties are only a few advantages of, which place it in the lead for investment and holding structures as well as company reorganisations.